Dow Theory: Yellow Flags or Green Light?

Mixed Message for Manufacturing Stock prices have a high correlation to economic activity and earnings. History tells us bear markets are often kicked-off by recessions. Recent economic data does not hint at an imminent recession. However, a mixed message came in a September 15 report on industrial production. From The Wall Street Journal:
U. S. industrial production fell in August for the first time since January, the latest sign of uneven improvement in the economy…’The trend in the data still looks decent, but has moderated noticeably from the much stronger gains reported earlier this year,’ said J. P. Morgan Chase economist Daniel Silver.
What Is Dow Theory? Dow Theory’s stance has changed in the last 30 days; this article covers the recent improvement in the observable evidence. Before we cover the updated charts, it is important to revisit the fundamental concepts they convey. Dow Theory is based on a series of Wall Street Journal articles written by Charles Dow. The basic tenets are easy to understand. Charles Dow believed that:
In order for industrial companies to increase their earnings, they had to produce and sell more goods. If industrial companies are selling more goods, then transportation companies must be delivering more goods to retailers and wholesalers.

This post was published at FinancialSense on 09/18/2014.